EQS-News: Lloyds Banking Group PLC / Key word(s): Interim Report
Lloyds Banking Group PLC: 2022 Q3 Interim Management Statement

27.10.2022 / 08:35 CET/CEST
The issuer is solely responsible for the content of this announcement.


 

Lloyds Banking Group plc

Q3 2022 Interim Management Statement

27 October 2022

 

RESULTS FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2022

 

“In February we announced an ambitious new strategy. While the operating environment has changed significantly since then, our customer focus remains unchanged. We continue to execute against our strategic goals, based on our objectives of transforming the business, while generating a stronger growth trajectory and enabling the Group to deliver higher, more sustainable returns.

Our income growth, balance sheet momentum and resilient customer franchise have enabled the Group to deliver a robust financial performance and strong capital generation, alongside updated guidance for 2022.

The current environment is concerning for many people and we are committed to maintaining support for our customers. The Group’s resilient business model and prudent approach to risk position the Group well to face the current macroeconomic uncertainties while generating enhanced returns for our shareholders.”

 Charlie Nunn, Group Chief Executive

Robust financial results with resilient credit performance and continued business momentum

  • Maintaining support for customers and progressing strategic priorities with significant strategic investment
  • Supporting the transition to a low carbon economy; announced new sector-based 2030 emissions reduction targets and a new net zero ambition for our supply chain in our Net Zero Activity Update1
  • Statutory profit after tax of £4.0 billion (nine months to 30 September 2021: £5.5 billion), with higher net income more than offset by impairment charges as a result of the revised economic outlook (versus a significant write-back in 2021)
  • Robust revenue growth supported by continued recovery in customer activity and UK Bank Rate changes. Net income of £13.0 billion, up 12 per cent; higher net interest and other income and continued low operating lease depreciation
  • Underlying net interest income up 15 per cent, significantly driven by a stronger banking net interest margin of 2.84 per cent year to date (2.98 per cent in the third quarter)
  • Operating costs of £6.4 billion, up 6 per cent compared to the first nine months of 2021, reflecting stable business-as-usual costs alongside higher planned strategic investment and new businesses
  • Underlying profit before impairment up 29 per cent to £6.5 billion in the period (with £2.4 billion in the third quarter), as a result of robust net income growth
  • Observed asset quality remains strong and the portfolio is well-positioned in the context of cost of living pressures. Underlying impairment of £1.0 billion (of which £0.7 billion was recognised in the third quarter) reflects a resilient observed credit performance, but impacted by the weakening economic outlook and associated scenarios in the third quarter, partially offset by COVID-19 releases

Continued franchise growth and strong capital generation

  • Loans and advances to customers at £456.3 billion were up £7.7 billion in the first nine months and up £0.2 billion in the quarter, with continued growth in the open mortgage book
  • Customer deposits of £484.3 billion were up £8.0 billion in the first nine months and £6.1 billion in the quarter. Loan to deposit ratio of 94 per cent continues to provide robust funding and liquidity and potential for growth
  • Capital generationof 191 basis points2 in the first nine months based on robust banking performance and including the Insurance dividend paid in July 2022
  • CET1 ratio of 15.0 per cent after ordinary dividend and variable pension contributions, remaining well ahead of the ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent. Commitment to consider excess capital returns as usual at year-end

Outlook

Given the robust financial performance in the first nine months of 2022 and incorporating revised macroeconomic forecasts in the third quarter, the Group is updating its 2022 guidance:

  • Banking net interest margin now expected to be greater than 290 basis points
  • Operating costs expected to be c.£8.8 billion
  • Asset quality ratio now expected to be c.30 basis points
  • Return on tangible equity expected to be c.13 per cent
  • Risk-weighted assets at the end of 2022 expected to be c.£210 billion
  • Capital generation now expected to be between 225 and 250 basis points2

1 The Net Zero Activity Update can be found at www.lloydsbankinggroup.com/investors/esg-information.html.

2 Excluding regulatory changes on 1 January 2022, ordinary dividend and variable pension contributions.

 

 

 

INCOME STATEMENT – UNDERLYING BASISA AND KEY BALANCE SHEET METRICS

  Nine months ended
30 Sep
2022
£m
    Nine months ended
30 Sep 2021
£m
    Change
%
  Three months ended
30 Sep 2022
£m
    Three months ended
30 Sep 2021
£m
    Change
%
                               
Underlying net interest income  9,529       8,270       15     3,394       2,852       19 
Underlying other income  3,811       3,753       2     1,282       1,336       (4)
Operating lease depreciation  (295)      (382)      23     (82)      (111)      26 
Net income  13,045       11,641       12     4,594       4,077       13 
Operating costs1  (6,436)      (6,066)      (6)    (2,187)      (2,013)      (9)
Remediation  (89)      (525)      83     (10)      (100)      90 
Total costs  (6,525)      (6,591)      1     (2,197)      (2,113)      (4)
Underlying profit before impairment  6,520       5,050       29     2,397       1,964       22 
Underlying impairment (charge) credit1  (1,045)      853           (668)      119       
Underlying profit  5,475       5,903       (7)    1,729       2,083       (17)
Restructuring1  (69)      (34)          (22)      (24)      8 
Volatility and other items  (237)      65           (199)      (30)      
Statutory profit before tax  5,169       5,934       (13)    1,508       2,029       (26)
Tax expense  (1,134)      (469)          (299)      (429)      30 
Statutory profit after tax  4,035       5,465       (26)    1,209       1,600       (24)
                               
Earnings per share 5.2p     7.1p     (1.9)p   1.5p     2.0p     (0.5)p
Banking net interest marginA 2.84%     2.52%     32bp   2.98%     2.55%     43bp
Average interest-earning banking assetsA  £451.4bn      £443.0bn      2     £454.9bn      £447.2bn      2 
Cost:income ratioA,1 50.0%     56.6%     (6.6)pp   47.8%     51.8%     (4.0)pp
Asset quality ratioA,1 0.30%     (0.25)%         0.57%     (0.10)%      
Return on tangible equityA 12.9%     17.6%     (4.7)pp   11.9%     14.5%     (2.6)pp

1 2021 comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23.

 

 

  At 30 Sep
2022
    At 30 Jun
2022
    Change
%
        At 31 Dec
2021
    Change
%
                               
Loans and advances to customers  £456.3bn      £456.1bn                £448.6bn      2 
Customer deposits  £484.3bn      £478.2bn      1           £476.3bn      2 
Loan to deposit ratioA 94%     95%     (1pp)         94%      
CET1 ratio 15.0%     14.7%     0.3pp         17.3%     (2.3)pp
Pro forma CET1 ratioA,1 15.0%     14.8%     0.2pp         16.3%     (1.3)pp
Total capital ratio 19.4%     19.3%     0.1pp         23.6%     (4.2)pp
MREL ratio 32.8%     32.4%     0.4pp         37.2%     (4.4)pp
UK leverage ratio 5.3%     5.3%               5.8%     (0.5)pp
Risk-weighted assets  £210.8bn      £209.6bn      1           £196.0bn      8 
Wholesale funding  £98.9bn      £97.7bn      1           £93.1bn      6 
Liquidity coverage ratio2 146%     142%     4.0pp         135%     11.0pp
Tangible net assets per shareA 49.0p     54.8p     (5.8)p         57.5p     (8.5)p

A See page 25.

1 The pro forma CET1 ratio comparative for 30 June 2022 reflects the interim dividend received from Insurance in July 2022. The 31 December 2021 comparative reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback, but prior to the impact of regulatory changes that came into effect on 1 January 2022.

2 The liquidity coverage ratio is calculated as a simple average of month-end observations over the previous 12 months.

 

 

QUARTERLY INFORMATIONA

  Quarter ended
30 Sep 2022
£m
    Quarter ended
30 Jun 2022
£m
    Quarter
ended
31 Mar
2022
£m
    Quarter
ended
31 Dec
2021
£m
    Quarter
ended
30 Sep
2021
£m
    Quarter
ended
30 Jun
2021
£m
    Quarter
ended
31 Mar
2021
£m
 
                                         
Underlying net interest income  3,394       3,190       2,945       2,893       2,852       2,741       2,677   
Underlying other income  1,282       1,268       1,261       1,307       1,336       1,282       1,135   
Operating lease depreciation  (82)      (119)      (94)      (78)      (111)      (123)      (148)  
Net income  4,594       4,339       4,112       4,122       4,077       3,900       3,664   
Operating costs1  (2,187)      (2,151)      (2,098)      (2,246)      (2,013)      (2,008)      (2,045)  
Remediation  (10)      (27)      (52)      (775)      (100)      (360)      (65)  
Total costs  (2,197)      (2,178)      (2,150)      (3,021)      (2,113)      (2,368)      (2,110)  
Underlying profit before impairment  2,397       2,161       1,962       1,101       1,964       1,532       1,554   
Underlying impairment (charge) credit1  (668)      (200)      (177)      532       119       374       360   
Underlying profit  1,729       1,961       1,785       1,633       2,083       1,906       1,914   
Restructuring1  (22)      (23)      (24)      (418)      (24)      6       (16)  
Volatility and other items  (199)      100       (138)      (247)      (30)      95       –   
Statutory profit before tax  1,508       2,038       1,623       968       2,029       2,007       1,898   
Tax (expense) credit  (299)      (416)      (419)      (548)      (429)      461       (501)  
Statutory profit after tax  1,209       1,622       1,204       420       1,600       2,468       1,397   
                                         
Banking net interest marginA 2.98%     2.87%     2.68%     2.57%     2.55%     2.51%     2.49%  
Average interest-earning banking assetsA  £454.9bn      £451.2bn      £448.0bn      £449.4bn      £447.2bn      £442.2bn      £439.4bn  
                                         
Cost:income ratioA,1 47.8%     50.2%     52.3%     73.3%     51.8%     60.7%     57.6%  
Asset quality ratioA,1 0.57%     0.17%     0.16%     (0.46)%     (0.10)%     (0.33)%     (0.33)%  
Return on tangible equityA 11.9%     15.6%     10.8%     2.9%     14.5%     24.4%     13.9%  
                                         
Loans and advances to customers  £456.3bn      £456.1bn      £451.8bn      £448.6bn      £450.5bn      £447.7bn      £443.5bn  
Customer deposits  £484.3bn      £478.2bn      £481.1bn      £476.3bn      £479.1bn      £474.4bn      £462.4bn  
Loan to deposit ratioA 94%     95%     94%     94%     94%     94%     96%  
                                         
Risk-weighted assets  £210.8bn      £209.6bn      £210.2bn      £196.0bn      £200.7bn      £200.9bn      £198.9bn  
Tangible net assets per shareA 49.0p     54.8p     56.5p     57.5p     56.6p     55.6p     52.4p  

1 2021 comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23.

 

BALANCE SHEET ANALYSIS

  At 30 Sep
2022
£bn
    At 30 Jun
2022
£bn
    Change
%
  At 30 Sep
2021
£bn
    Change
%
  At 31 Dec
2021
£bn
    Change
%
                                   
Loans and advances to customers                                  
Open mortgage book  298.4       296.6       1     292.6       2     293.3       2 
Closed mortgage book  12.3       13.1       (6)    14.8       (17)    14.2       (13)
Credit cards2  14.3       14.2       1     13.5       6     13.8       4 
UK Retail unsecured loans  8.8       8.5       4     8.1       9     8.1       9 
UK Motor Finance  14.2       14.2           14.1       1     14.0       1 
Overdrafts  1.0       1.0           1.0           1.0       
Retail other1  13.0       12.5       4     10.8       20     10.9       19 
Wealth2  1.0       1.0           1.0           1.0       
Small and Medium Businesses2  39.8       41.1       (3)    43.8       (9)    42.5       (6)
Corporate and Institutional Banking2  57.6       55.7       3     51.0       13     50.0       15 
Central items2,3  (4.1)      (1.8)          (0.2)          (0.2)      
Loans and advances to customers  456.3       456.1           450.5       1     448.6       2 
                                   
Customer deposits                                  
Retail current accounts  115.7       113.4       2     109.6       6     111.5       4 
Retail relationship savings accounts  165.7       165.8           162.6       2     164.5       1 
Retail tactical savings accounts  16.2       16.9       (4)    16.8       (4)    16.8       (4)
Wealth2  14.9       14.9           15.1       (1)    15.6       (4)
Commercial Banking deposits  170.2       166.7       2     174.5       (2)    167.5       2 
Central items2  1.6       0.5           0.5           0.4       
Total customer deposits  484.3       478.2       1     479.1       1     476.3       2 
                                   
Total assets  892.9       890.4           882.0       1     886.6       1 
Total liabilities  846.5       840.3       1     829.4       2     833.4       2 
                                   
Ordinary shareholders’ equity  40.0       44.4       (10)    46.5       (14)    47.1       (15)
Other equity instruments  6.2       5.5       13     5.9       5     5.9       5 
Non-controlling interests  0.2       0.2           0.2           0.2       
Total equity  46.4       50.1       (7)    52.6       (12)    53.2       (13)
                                   
Ordinary shares in issue, excluding own shares 67,464m     68,702m      (2)   70,979m      (5)   70,996m      (5)

1 Primarily Europe.

2 The portfolios shown reflect the new organisation structure; comparatives have been presented on a consistent basis. See page 25.

3 Includes central fair value hedge accounting adjustments. 30 June 2022 included a £200 million ECL central adjustment that was not allocated to specific portfolios (30 September 2021 and 31 December 2021: £400 million). In the third quarter of 2022 this central adjustment was released.

 

 

GROUP RESULTS – STATUTORY BASIS

 

 

Summary income statement Nine months ended
30 Sep
2022
£m
    Nine months ended
30 Sep
2021
£m
    Change
%
Net interest income  11,061       7,073       56 
Other income  (17,984)      20,012       
Total income1  (6,923)      27,085       
Insurance claims1  20,181       (14,803)      
Total income, net of insurance claims  13,258       12,282       8 
Operating expenses  (7,033)      (7,194)      2 
Impairment (charge) credit  (1,056)      846       
Profit before tax  5,169       5,934       (13)
Tax expense  (1,134)      (469)      
Profit for the period  4,035       5,465       (26)
               
Profit attributable to ordinary shareholders  3,632       5,064       (28)
Profit attributable to other equity holders  327       321       2 
Profit attributable to non-controlling interests  76       80       (5)
Profit for the period  4,035       5,465       (26)
               
Ordinary shares in issue (weighted-average – basic) 69,478m     70,919m      (2)
Basic earnings per share 5.2p     7.1p     (1.9)p

1 Includes income and expense attributable to the policyholders of the Group’s long-term assurance funds that materially offset in arriving at profit attributable to equity shareholders. These can, depending on market movements, lead to significant variances on a statutory basis in total income and insurance claims from one period to the next.

 

 

Summary balance sheet At 30 Sep 2022
£m
    At 31 Dec
2021
£m
    Change
%
Assets              
Cash and balances at central banks  84,841       76,420       11 
Financial assets at fair value through profit or loss  174,235       206,771       (16)
Derivative financial instruments  34,919       22,051       58 
Financial assets at amortised cost  536,843       517,156       4 
Financial assets at fair value through other comprehensive income  21,303       28,137       (24)
Other assets  40,781       35,990       13 
Total assets  892,922       886,525       1 
               
Liabilities              
Deposits from banks  9,032       7,647       18 
Customer deposits  484,303       476,344       2 
Repurchase agreements at amortised cost1  46,378       31,125       49 
Financial liabilities at fair value through profit or loss  21,012       23,123       (9)
Derivative financial instruments  33,983       18,060       88 
Debt securities in issue  72,448       71,552       1 
Liabilities arising from insurance and investment contracts  142,977       168,463       (15)
Other liabilities  26,174       23,951       9 
Subordinated liabilities  10,242       13,108       (22)
Total liabilities  846,549       833,373       2 
Total equity  46,373       53,152       (13)
Total equity and liabilities  892,922       886,525       1 

1 Repurchase agreements at amortised cost, previously included within other liabilities, are now shown separately; comparatives have been presented on a consistent basis.

 

 

REVIEW OF PERFORMANCE

Robust financial performance with continued business momentum

Statutory results

The Group’s statutory profit before tax for the first nine months of 2022 was £5,169 million, 13 per cent lower than the same period in 2021. Results benefitted from higher income, more than offset by the impact of an impairment charge (compared to a credit in the prior year), including updates to the economic outlook in the third quarter. Statutory profit after tax was £4,035 million (nine months to 30 September 2021: £5,465 million, which included the benefit of a deferred tax remeasurement). In the third quarter of the year, statutory profit before tax was £1,508 million and statutory profit after tax was £1,209 million, a decrease on the second quarter of 26 per cent and 25 per cent respectively, again as a result of higher income more than offset by the impairment charge in light of the deterioration in the macroeconomic outlook as at 30 September 2022.

The Group’s statutory income statement includes income and expenses attributable to the policyholders of the Group’s long-term assurance funds. These items materially offset in arriving at profit attributable to equity shareholders but can, depending on market movements, lead to significant variances on a statutory basis between total income and insurance claims from one period to the next. In the nine months to 30 September 2022, due to deteriorating market conditions, the Group recognised losses on policyholder investments within total income which were materially offset by the corresponding reduction in insurance and investment contract liabilities, recognised as a decrease in insurance claims expense and a decrease in the amounts payable to unit holders in the Group’s consolidated open-ended investment companies, recognised within net interest income.

Total statutory income net of insurance claims for the first nine months was £13,258 million, an increase of 8 per cent on the first nine months of 2021, reflecting continued recovery in customer activity and UK Bank Rate changes. The Group has maintained its focus on cost management, whilst increasing strategic investment as planned.

Loans and advances to customers are up 2 per cent on 31 December 2021 at £456.3 billion, including continued growth of £5.1 billion in the open mortgage book (£1.8 billion in the third quarter), alongside higher retail unsecured loan and credit card balances. Commercial Banking balances increased by £4.9 billion (including £0.6 billion in the third quarter) due to attractive growth opportunities as well as foreign exchange movements in the Corporate and Institutional Banking portfolio. Customer deposits have increased by £8.0 billion since the end of 2021, to £484.3 billion. This included Retail current account growth of £4.2 billion and Retail relationship savings growth of £1.2 billion, along with Commercial Banking deposit growth of £2.7 billion. In the nine months to 30 September 2022, due to market conditions, a reduction was seen in policyholder investments, primarily within financial assets at fair value through profit or loss. This was materially offset by a corresponding reduction in the related insurance and investment contract liabilities.

Total equity reduced during the period as the Group’s profits were more than offset by reductions in the cash flow hedging reserve due to the rising rate environment, the impact of pension scheme remeasurements given market conditions and the impact of in-year distributions, including the share buyback programme that was announced in February 2022. This programme completed on 11 October 2022, with c.4.5 billion ordinary shares repurchased.

 

 

REVIEW OF PERFORMANCE (continued)

Underlying resultsA

The Group’s underlying profit for the first nine months of the year was £5,475 million, compared to £5,903 million for the same period in 2021. Growth in net income was more than offset by an increased impairment charge, largely given the impact of the updated economic outlook and associated scenarios in the third quarter versus the underlying impairment credit for the same period in 2021. Underlying profit before impairment for the period was up 29 per cent to £6,520 million, driven by robust net income growth and lower remediation costs. In the third quarter, underlying profit before impairment was £2,397 million, up 11 per cent on the second quarter.

 

Net income of £13,045 million was up 12 per cent on the first nine months of 2021, with higher net interest income and other income as well as a continued low charge for operating lease depreciation.

Net interest income of £9,529 million was up 15 per cent, largely driven by a stronger banking net interest margin of 2.84 per cent (nine months to 30 September 2021: 2.52 per cent). The net interest margin benefitted from the UK Bank Rate increases, structural hedge earnings from the rising rate environment, continued funding and capital optimisation and robust balance growth, partly offset by mortgage margin reductions. In the third quarter, the net interest margin rose to 2.98 per cent. Average interest-earning banking assets were up 2 per cent compared to the first nine months of 2021 at £451.4 billion, driven by continued growth in the open mortgage book. The Group now expects the banking net interest margin for 2022 to be greater than 290 basis points.

The Group manages the risk to its earnings and capital from movements in interest rates by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 30 September 2022, the Group’s structural hedge had an approved capacity of £250 billion (up £10 billion on 31 December 2021 and stable compared to 30 June 2022), including some of the balances from the deposit growth since the start of the coronavirus pandemic. The Group continues to review recent periods’ deposit growth and its eligibility for the structural hedge. The nominal balance of the structural hedge was £250 billion at 30 September 2022 (31 December 2021: £240 billion) with a weighted-average duration of approximately three-and-a-half years (31 December 2021: approximately three-and-a-half years). The Group generated £1.9 billion of total gross income from structural hedge balances in the first nine months of 2022, representing material growth over the same period in 2021 (nine months to 30 September 2021: £1.6 billion).

Other income of £3,811 million was 2 per cent higher compared to £3,753 million for the first nine months of 2021, reflecting solid performance across Retail, Commercial Banking, Insurance, Pensions and Investments (previously Insurance and Wealth) and the Group’s equity investments businesses. This included £1,282 million in the third quarter, slightly up on the second quarter.

Within Retail, other income was up 11 per cent on prior year, including improved current account and credit card performance. Commercial Banking was up 3 per cent versus the prior year due to higher financial markets activity and strong performance in transaction banking, partly offset by lower levels of corporate financing. Insurance, Pensions and Investments other income was 6 per cent higher than the prior year. This largely reflected the impact of increased workplace pension sales and bulk annuity deals along with the inclusion of Embark income and a benefit from assumption changes. Growth was partly offset by a decrease in the general insurance business contribution driven by market challenges, and particularly storm and subsidence claims. Assumption changes were £119 million including £47 million in the third quarter (nine months to 30 September 2021: £33 million). Other income associated with the Group’s equity investments businesses, including Lloyds Development Capital, was lower after high contributions and releases in 2021.

Operating lease depreciation decreased to £295 million (nine months to 30 September 2021: £382 million), reflecting continued strength in used car prices, combined with the ongoing impact of a reduced, but stabilising Lex fleet size, given industry-wide supply constraints in the new car market. Operating lease depreciation further reduced to £82 million in the third quarter, compared to £119 million in the second quarter.

The Group delivered good organic growth in Insurance, Pensions and Investments and Wealth (within Retail) assets under administration (AuA), with over £6 billion net new money in open book AuA over the period. In total, open book AuA stand at £154 billion.

 

 

 

 

 

 

 

 

REVIEW OF PERFORMANCE (continued)

Cost discipline remains a core focus for the Group. The Group’s cost:income ratio was 50.0 per cent compared to 56.6 per cent in the first nine months of 2021. Total costs of £6,525 million were 1 per cent lower than in the first nine months of 2021 (with £2,197 million in the third quarter). Within this, lower remediation costs (down 83 per cent) were partially offset by increased operating costs of £6,436 million (up 6 per cent), reflecting higher planned strategic investment and new businesses. Business-as-usual costs were stable. Operating costs as previously guided are still expected to be c.£8.8 billion for full-year 2022 (2021: £8.3 billion).

In the first nine months of 2022 the Group recognised remediation costs of £89 million (£10 million in the third quarter), principally relating to pre-existing programmes and significantly lower compared to the first nine months of 2021 (£525 million). There have been no further charges relating to HBOS Reading since the year-end and the provision held continues to reflect the Group’s best estimate of its full liability, albeit significant uncertainties remain.

 

Impairment was a net charge of £1,045 million (including £668 million in the third quarter), compared to a net credit of £853 million for the first nine months of 2021. This reflected an observed performance charge of £532 million in the year to date (nine months to 30 September 2021: £245 million, net of £261 million of write-backs), equivalent to an asset quality ratio of 15 basis points and a £513 million charge (nine months to 30 September 2021: a credit of £1,098 million) from updates to the assessment of the economic outlook and associated scenarios. The updated outlook includes elevated risks from a higher inflation and interest rate environment, offset by a £200 million release of the COVID-19 central adjustment, driving £418 million of the £668 million charge in the third quarter. The asset quality ratio year to date is now 30 basis points.

The Group’s loan portfolio continues to be well-positioned, reflecting a prudent through-the-cycle approach to lending with high levels of security, also reflected in strong recovery performance. Observed credit performance remains stable, with very modest evidence of deterioration and the flow of assets into arrears, defaults and write-offs at low levels and below pre-pandemic levels. These help sustain a low observed performance charge of £250 million in the third quarter, higher than earlier quarters in the year, largely due to fewer write-backs from asset sales and model-related releases. Stage 3 loans and advances have been stable across the third quarter (see below). Credit card minimum payers and overdraft and revolving credit facility (RCF) utilisation rates have remained low and in line with recent trends.

The Group’s expected credit loss (ECL) allowance has increased in the first nine months of the year to £5.0 billion (31 December 2021: £4.5 billion). This reflects the balance of risks shifting from COVID-19 to increased inflationary pressures and rising interest rates within the Group’s base case and wider economic scenarios. The deterioration in the economic outlook is now reflected in variables which credit models better capture. As a result, the Group’s reliance on judgemental overlays for modelling risks in relation to inflationary pressures has reduced from £0.3 billion at the half-year to £0.1 billion in the third quarter, with these risks now captured more fully in models.

Management judgements in respect of COVID-19 are now £0.1 billion, having reduced by £0.2 billion in the third quarter and compared to £0.8 billion at 31 December 2021. Of the £0.7 billion reduction since 31 December 2021, £0.2 billion is now captured as expected within ECL portfolio models where previously distorted data or trends have now normalised. The remaining £0.5 billion release drives a net ECL reduction and credit to the impairment charge, with the bulk relating to the £0.4 billion central adjustment (£0.2 billion released in each of the second and third quarters) and £0.1 billion relating to ECL held against certain Commercial sectors in relation to the specific risk posed by the virus and potential social restrictions (released to profit in the first half).

Stage 2 loans and advances increased to £64 billion (31 December 2021: £42 billion), with 92 per cent up to date. Of the £22 billion increase, £15 billion occurred in the third quarter as a result of the updated economic outlook, largely in UK mortgages and Commercial Banking. 99 per cent of the increase in the third quarter related to up to date loans. The increases in Stage 2 assets during the first half of the year, and in Stage 3 loans in the year to date, are not reflective of observed deterioration, but driven by changes in credit risk measurement and modelling associated with CRD IV regulatory requirements1 since the end of 2021. Stage 3 loans of £11 billion as at 30 September 2022 were stable compared to the second quarter.

On the basis of the Group’s updated base case and the significant change in economic context and associated scenarios since half-year, the Group now expects the 2022 asset quality ratio to be c.30 basis points.

1 As previously outlined, on 1 January 2022 the Group amended its definition of Stage 3 for UK mortgages, maintaining alignment between IFRS 9 and regulatory definitions of default. For UK mortgages, default was previously deemed to have occurred no later than when a payment was 180 days past due. In line with CRD IV this definition has now been reduced to 90 days, as well as including end-of-term payments on past due interest-only accounts and any non-performing loans. Furthermore, additional assets moved to Stage 2 given the consequential change in approach to the prediction and modelling of up to date accounts and their likelihood of reaching the new broader definition of default in the future. Given the accounts that moved to Stage 2 were up to date with low probability of default, there was no material ECL impact

 

 

 

REVIEW OF PERFORMANCE (continued)

Restructuring costs of £69 million were higher than in the first nine months of 2021 (£34 million) and included costs associated with the integration of Embark. Since the first quarter of 2022 all restructuring costs, with the exception of merger, acquisition and integration costs, have been reported as part of the Group’s operating costs.

Volatility and other items were a net loss of £237 million in the first nine months of 2022, comprising £95 million of negative market volatility and £142 million relating to amortisation of purchased intangibles and fair value unwind. Market volatility included negative insurance volatility of £144 million due to rising interest rates and wider bond spreads which was partly offset by positive banking volatility of £74 million. This compares to gains in the first nine months of 2021 including £132 million of positive insurance volatility. In the third quarter, market volatility included £102 million of negative insurance volatility and £35 million of negative banking volatility, again principally from rising interest rates.

The return on tangible equity for the first nine months of 2022 was 12.9 per cent reflecting the Group’s robust financial performance (nine months to 30 September 2021: 17.6 per cent, benefitting from a net impairment credit and remeasurement of deferred tax assets). The Group continues to expect the return on tangible equity for 2022 to be c.13 per cent.

 

Capital

 

The Group’s CET1 capital ratio reduced from 16.3 per cent on a pro forma basis at 31 December 2021 to 15.0 per cent at 30 September 2022. This included a reduction of 230 basis points on 1 January 2022 for regulatory changes (as previously reported), subsequently offset by strong capital generation of 191 basis points during the first nine months of this year. Capital generation reflected banking profitability of 169 basis points, including a net impairment offset of 31 basis points, plus 16 basis points for the interim dividend received from the Insurance business in July 2022 (£300 million). The capital generation further benefitted from a reduction in underlying risk-weighted assets, post 1 January 2022 regulatory changes, equivalent to 14 basis points and other movements of 23 basis points. This was offset in part by 31 basis points related to the full 2022 fixed pension deficit contributions for the Group’s defined benefit pension schemes. Capital generation during the third quarter of 52 basis points was driven by banking profitability of 52 basis points (including a net impairment offset of 18 basis points) and other movements of 6 basis points. This was offset by a reduction of 6 basis points from an increase in risk-weighted assets.

The net impairment offset of 31 basis points for the year to date reflects the impairment charge of 41 basis points, offset by IFRS 9 dynamic relief of 10 basis points resulting from the increase in Stage 1 and Stage 2 expected credit losses in the third quarter. In relation to capital usage, the impact of the interim ordinary dividend and the foreseeable ordinary dividend accrual at 30 September 2022 equated to 60 basis points.

During the first nine months of the year a total of £1.8 billion in pension deficit contributions (both fixed and variable) has been paid into the Group’s three main defined benefit pension schemes. As previously announced, the fixed contributions for the year of £0.8 billion (equivalent to 31 basis points) were paid in full in the first quarter. The variable contributions of £1.0 billion reflected £0.5 billion paid in the first quarter and £0.5 billion in the third quarter (equivalent to 37 basis points in total). This substantially covers the payment of the agreed variable pension contributions (c.95 per cent) relating to 30 per cent of in-year distributions, in accordance with the current agreement with the Trustees, with a small residual to be paid in the fourth quarter. The impact of recent volatility has had no material impact on the funding position of the pension schemes.

The Group now expects capital generation in 2022 of between 225 and 250 basis points. The Group maintains its commitment to consider the return of excess capital as usual at year-end.

 

REVIEW OF PERFORMANCE (continued)

Pro forma CET1 ratio as at 31 December 20211 16.3%  
Regulatory change on 1 January 2022 (bps)  (230)  
Pro forma CET1 ratio as at 1 January 2022 14.0%  
Banking build (including impairment charge) (bps)  169   
Insurance dividend (bps)  16   
Underlying risk-weighted assets (bps)  14   
Fixed pension deficit contributions (bps)  (31)  
Other movements (bps)  23   
Capital generation (bps)  191   
Ordinary dividend (bps)  (60)  
Variable pension contributions (bps)  (37)  
Net movement in CET1 ratio excluding regulatory change (bps)  94   
CET1 ratio as at 30 September 2022 15.0%  

1 31 December 2021 ratio reflects the dividend received from Insurance in February 2022 and the full impact of the share buyback.

 

Risk-weighted assets increased by £16 billion to £212 billion (pro forma) on 1 January 2022, reflecting regulatory changes which include the anticipated impact of the implementation of new CRD IV models to meet revised regulatory standards for modelled outputs. Risk-weighted assets subsequently reduced by £1 billion during the first nine months of the year to £211 billion at 30 September 2022, largely reflecting optimisation activity and Retail model reductions linked to the resilient underlying credit performance, partly offset by the growth in balance sheet lending and impact of foreign exchange. The £1 billion increase in risk-weighted assets during the third quarter was largely driven by the growth in lending and foreign exchange impacts, partially offset by further optimisation and Retail model reductions. The new CRD IV models remain subject to finalisation and approval by the PRA and therefore the final risk-weighted asset impact remains subject to this.

The Group continues to expect risk-weighted assets at the end of 2022 to be around £210 billion.

In October the PRA reduced the Group’s Pillar 2A CET1 capital requirement to around 1.5 per cent of risk-weighted assets (previously around 2 per cent of risk-weighted assets), with the Group’s regulatory minimum CET1 capital requirement now around 10.5 per cent. The planned increases in the UK countercyclical capital buffer rate to 1 per cent in December 2022 and to 2 per cent from July 2023 will lead to an increase in the Group’s countercyclical capital buffer (CCyB), initially to around 0.9 per cent and then to 1.8 per cent, which will be partially offset by the removal of the 0.25 per cent CCyB related element of the PRA buffer. The Board’s view of the ongoing level of CET1 capital required to grow the business, meet current and future regulatory requirements and cover uncertainties continues to be around 12.5 per cent, plus a management buffer of around 1 per cent.

Tangible net assets per share were 49.0 pence, down from 57.5 pence at 31 December 2021, with the favourable impact from profits more than offset by cash flow hedging reserve movements as a result of increased interest rates (9.5 pence), pensions remeasurements (2.2 pence) and the impacts from payment of ordinary dividends (2.2 pence).

 

FURTHER IMPAIRMENT DETAIL

The analyses which follow have been presented on an underlying basis. See page 23.

 

Underlying impairmentA

  Nine months ended
30 Sep
2022
£m
    Nine months ended
30 Sep
20211
£m
    Change
%
  Three months ended
30 Sep 2022
£m
    Three months ended
30 Sep 20211
£m
    Change
%
                               
Charges (credits) pre-updated MES2                              
Retail3  520       601       13     235       163       (44)
Commercial Banking3  1       (354)          8       (21)      
Other3  11       (2)          7       –       
   532       245           250       142       
Updated economic outlook                              
Retail3  541       (678)          370       (141)      
Commercial Banking3  372       (420)          248       (120)      
Other3  (400)      –           (200)      –       
   513       (1,098)          418       (261)      
Underlying impairment charge (credit)A  1,045       (853)          668       (119)      
                               
Asset quality ratioA 0.30%     (0.25)%         0.57%     (0.10)%      

1 Non lending-related fraud costs, previously reported within underlying impairment, are now included within operating costs. Comparatives have been presented on a consistent basis.

2 Impairment charges absent the impact from updated economic outlook, thus reflecting observed movements in credit quality. Coronavirus impacted restructuring cases, previously disclosed separately, are now reported within charges pre-updated MES (multiple economic scenarios); comparatives have been presented on a consistent basis.

3 Impairment charges for Retail, Commercial Banking and Other reflect the new organisation structure; comparatives have been presented on a consistent basis. See page 25.

 

 

Total expected credit loss allowance

  Underlying basisA
  At 30 Sep 2022
£m
    At 30 Jun 2022
£m
    At 31 Dec
2021
£m
 
                 
Customer related balances                
Drawn  4,685       4,247       4,277   
Undrawn  286       236       200   
   4,971       4,483       4,477   
Loans and advances to banks  7       4       1   
Debt securities  6       4       3   
Other assets  33       23       18   
Total ECL allowance  5,017       4,514       4,499   

 

 

 

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance – underlying basisA

At 30 September 2022 Stage 1
£m
    Stage 2
£m
    Stage 3
£m
    Total
£m
    Stage 2
as % of
total
    Stage 3
as % of
total
 
                                   
Loans and advances to customers
UK mortgages  259,541       46,153       6,613       312,307       14.8       2.1   
Credit cards  12,018       2,526       292       14,836       17.0       2.0   
Loans and overdrafts  8,723       1,339       255       10,317       13.0       2.5   
UK Motor Finance  12,335       1,949       169       14,453       13.5       1.2   
Other  13,294       650       158       14,102       4.6       1.1   
Retail1  305,911       52,617       7,487       366,015       14.4       2.0   
Small and Medium Businesses  31,783       6,266       2,279       40,328       15.5       5.7   
Corporate and Institutional Banking  52,001       5,029       1,650       58,680       8.6       2.8   
Commercial Banking  83,784       11,295       3,929       99,008       11.4       4.0   
Equity Investments and Central Items2  (4,010)             6       (4,004)              
Total gross lending  385,685       63,912       11,422       461,019       13.9       2.5   
ECL allowance on drawn balances  (632)      (1,847)      (2,206)      (4,685)              
Net balance sheet carrying value  385,053       62,065       9,216       456,334               
                                   
Customer related ECL allowance (drawn and undrawn)
UK mortgages  48       705       823       1,576               
Credit cards  182       382       118       682               
Loans and overdrafts  175       273       138       586               
UK Motor Finance3  107       85       93       285               
Other  15       18       48       81               
Retail1  527       1,463       1,220       3,210               
Small and Medium Businesses  104       292       153       549               
Corporate and Institutional Banking  133       243       832       1,208               
Commercial Banking  237       535       985       1,757               
Equity Investments and Central Items                4       4               
Total  764       1,998       2,209       4,971               
                                   
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers4
UK mortgages         1.5       12.4       0.5               
Credit cards  1.5       15.1       54.4       4.6               
Loans and overdrafts  2.0       20.4       72.6       5.7               
UK Motor Finance  0.9       4.4       55.0       2.0               
Other  0.1       2.8       30.4       0.6               
Retail1  0.2       2.8       16.6       0.9               
Small and Medium Businesses  0.3       4.7       13.0       1.4               
Corporate and Institutional Banking  0.3       4.8       50.5       2.1               
Commercial Banking  0.3       4.7       34.9       1.8               
Equity Investments and Central Items               66.7                     
Total  0.2       3.1       21.7       1.1               

1 Retail balances exclude the impact of the HBOS acquisition-related adjustments.

2 Contains centralised fair value hedge accounting adjustments.

3 UK Motor Finance for Stages 1 and 2 include £93 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

4 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £75 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £1,104 million and Corporate and Institutional Banking of £1 million.

 

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance – underlying basisA (continued)

At 30 June 2022 Stage 1
£m
    Stage 2
£m
    Stage 3
£m
    Total
£m
    Stage 2
as % of
total
    Stage 3
as % of
total
 
                                   
Loans and advances to customers
UK mortgages  268,568       35,555       6,764       310,887       11.4       2.2   
Credit cards1  12,186       2,289       280       14,755       15.5       1.9   
Loans and overdrafts  8,666       1,144       256       10,066       11.4       2.5   
UK Motor Finance  12,476       1,832       179       14,487       12.6       1.2   
Other1  12,711       626       150       13,487       4.6       1.1   
Retail2  314,607       41,446       7,629       363,682       11.4       2.1   
Small and Medium Businesses1  34,310       5,053       2,147       41,510       12.2       5.2   
Corporate and Institutional Banking1  52,129       2,910       1,653       56,692       5.1       2.9   
Commercial Banking  86,439       7,963       3,800       98,202       8.1       3.9   
Equity Investments and Central Items3  (1,549)      1       6       (1,542)              
Total gross lending  399,497       49,410       11,435       460,342       10.7       2.5   
ECL allowance on drawn balances  (776)      (1,389)      (2,082)      (4,247)              
Net balance sheet carrying value  398,721       48,021       9,353       456,095               
                                   
Customer related ECL allowance (drawn and undrawn)
UK mortgages  45       470       716       1,231               
Credit cards1  172       346       111       629               
Loans and overdrafts  164       243       135       542               
UK Motor Finance4  105       80       105       290               
Other1  14       16       48       78               
Retail2  500       1,155       1,115       2,770               
Small and Medium Businesses1  106       177       153       436               
Corporate and Institutional Banking1  93       166       814       1,073               
Commercial Banking  199       343       967       1,509               
Equity Investments and Central Items  200       –       4       204               
Total  899       1,498       2,086       4,483               
                                   
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers5
UK mortgages  –       1.3       10.6       0.4               
Credit cards1  1.4       15.1       53.6       4.3               
Loans and overdrafts  1.9       21.2       70.7       5.4               
UK Motor Finance  0.8       4.4       58.7       2.0               
Other1  0.1       2.6       32.0       0.6               
Retail2  0.2       2.8       14.9       0.8               
Small and Medium Businesses1  0.3       3.5       12.5       1.1               
Corporate and Institutional Banking1  0.2       5.7       49.3       1.9               
Commercial Banking  0.2       4.3       33.6       1.6               
Equity Investments and Central Items6        –       66.7                     
Total  0.2       3.0       20.1       1.0               

1 Reflects the new organisation structure. See page 25.

2 Retail balances exclude the impact of the HBOS acquisition-related adjustments.

3 Contains centralised fair value hedge accounting adjustments.

4 UK Motor Finance for Stages 1 and 2 include £94 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

5 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £73 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £921 million and Corporate and Institutional Banking of £1 million.

6 Equity Investments and Central Items excludes the £200 million ECL central adjustment.

FURTHER IMPAIRMENT DETAIL (continued)

Loans and advances to customers and expected credit loss allowance – underlying basisA (continued)

At 31 December 2021 Stage 1
£m
    Stage 2
£m
    Stage 3
£m
    Total
£m
    Stage 2
as % of
total
    Stage 3
as % of
total
 
                                   
Loans and advances to customers
UK mortgages  276,021       28,579       4,191       308,791       9.3       1.4   
Credit cards1  11,905       2,075       292       14,272       14.5       2.0   
Loans and overdrafts  8,181       1,105       271       9,557       11.6       2.8   
UK Motor Finance  12,247       1,828       201       14,276       12.8       1.4   
Other1  11,198       593       169       11,960       5.0       1.4   
Retail2  319,552       34,180       5,124       358,856       9.5       1.4   
Small and Medium Businesses1  36,134       4,992       1,747       42,873       11.6       4.1   
Corporate and Institutional Banking1  46,585       2,538       1,816       50,939       5.0       3.6   
Commercial Banking  82,719       7,530       3,563       93,812       8.0       3.8   
Equity Investments and Central Items3  144       –       7       151       –       4.6   
Total gross lending  402,415       41,710       8,694       452,819       9.2       1.9   
ECL allowance on drawn balances  (919)      (1,377)      (1,981)      (4,277)              
Net balance sheet carrying value  401,496       40,333       6,713       448,542               
                                   
Customer related ECL allowance (drawn and undrawn)
UK mortgages  50       653       581       1,284               
Credit cards1  147       253       131       531               
Loans and overdrafts  136       170       139       445               
UK Motor Finance4  108       74       116       298               
Other1  15       15       52       82               
Retail2  456       1,165       1,019       2,640               
Small and Medium Businesses1  104       176       179       459               
Corporate and Institutional Banking1  68       122       782       972               
Commercial Banking  172       298       961       1,431               
Equity Investments and Central Items  400       –       6       406               
Total  1,028       1,463       1,986       4,477               
                                   
Customer related ECL allowance (drawn and undrawn) as a percentage of loans and advances to customers5
UK mortgages  –       2.3       13.9       0.4               
Credit cards1  1.2       12.2       58.2       3.7               
Loans and overdrafts  1.7       15.4       67.5       4.7               
UK Motor Finance  0.9       4.0       57.7       2.1               
Other1  0.1       2.5       30.8       0.7               
Retail2  0.1       3.4       20.4       0.7               
Small and Medium Businesses1  0.3       3.5       14.5       1.1               
Corporate and Institutional Banking1  0.1       4.8       43.1       1.9               
Commercial Banking  0.2       4.0       31.6       1.5               
Equity Investments and Central Items6  –       –       85.7       4.0               
Total  0.3       3.5       24.7       1.0               

1 Reflects the new organisation structure. See page 25.

2 Retail balances exclude the impact of the HBOS and MBNA acquisition-related adjustments.

3 Contains centralised fair value hedge accounting adjustments.

4 UK Motor Finance for Stages 1 and 2 include £95 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.

5 Total and Stage 3 ECL allowances as a percentage of drawn balances exclude loans in recoveries in Credit cards of £67 million, Loans and overdrafts of £65 million, Small and Medium Businesses of £515 million and Corporate and Institutional Banking of £3 million.

6 Equity Investments and Central Items excludes the £400 million ECL central adjustment.

 

FURTHER IMPAIRMENT DETAIL (continued)

Stage 2 loans and advances to customers and expected credit loss allowance – underlying basisA

  Up to date   1 to 30 days
past due2
  Over 30 days
past due
  Total
  PD movements   Other1      
At 30 September 2022 Gross
lending
£m
    ECL3
£m
    Gross
lending
£m
    ECL3
£m
    Gross
lending
£m
    ECL3
£m
    Gross
lending
£m
    ECL3
£m
    Gross
lending
£m
    ECL3
£m
 
                                                           
UK mortgages  34,716       257       7,915       213       2,349       118       1,173       117       46,153       705   
Credit cards  2,275       291       132       47       90       28       29       16       2,526       382   
Loans and overdrafts  943       169       232       45       121       39       43       20       1,339       273   
UK Motor Finance  854       27       927       23       136       25       32       10       1,949       85   
Other  166       4       394       8       54       4       36       2       650       18   
Retail  38,954       748       9,600       336       2,750       214       1,313       165       52,617       1,463   
Small and Medium Businesses  4,408       246       1,235       26       399       13       224       7       6,266       292   
Corporate and Institutional Banking  4,856       242       39              14              120       1       5,029       243   
Commercial Banking  9,264       488       1,274       26       413       13       344       8       11,295       535   
Equity Investments and Central Items                                                                    
Total  48,218       1,236       10,874       362       3,163       227       1,657       173       63,912       1,998   
                                                           
At 30 June 2022                                                        
UK mortgages  24,356       193       7,836       161       2,290       60       1,073       56       35,555       470   
Credit cards4  2,042       257       131       45       87       28       29       16       2,289       346   
Loans and overdrafts  735       140       235       42       134       43       40       18       1,144       243   
UK Motor Finance  675       24       977       21       143       25       37       10       1,832       80   
Other4  169       3       354       7       54       3       49       3       626       16   
Retail  27,977       617       9,533       276       2,708       159       1,228       103       41,446       1,155   
Small and Medium Businesses4  3,146       139       1,257       22       413       10       237       6       5,053       177   
Corporate and Institutional Banking4  2,672       160       123       3       26       3       89       –       2,910       166   
Commercial Banking  5,818       299       1,380       25       439       13       326       6       7,963       343   
Equity Investments and Central Items  –       –       1       –       –       –       –       –       1       –   
Total  33,795       916       10,914       301       3,147       172       1,554       109       49,410       1,498   
                                                           
At 31 December 2021                                                          
UK mortgages  17,917       226       6,053       222       2,270       73       2,339       132       28,579       653   
Credit cards4  1,754       179       209       41       86       21       26       12       2,075       253   
Loans and overdrafts  505       82       448       43       113       30       39       15       1,105       170   
UK Motor Finance  581       20       1,089       26       124       19       34       9       1,828       74   
Other4  194       4       306       7       44       2       49       2       593       15   
Retail  20,951       511       8,105       339       2,637       145       2,487       170       34,180       1,165   
Small and Medium Businesses4  3,570       153       936       14       297       6       189       3       4,992       176   
Corporate and Institutional Banking4  2,479       119       25       3       6       –       28       –       2,538       122   
Commercial Banking  6,049       272       961       17       303       6       217       3       7,530       298   
Equity Investments and Central Items  –       –       –       –       –       –       –       –       –       –   
Total  27,000       783       9,066       356       2,940       151       2,704       173       41,710       1,463   

1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.

2 Includes assets that have triggered PD movements, or other rules, given that being 1-29 days in arrears in and of itself is not a Stage 2 trigger.

3 Expected credit loss allowance on loans and advances to customers (drawn and undrawn).

4 Reflects the new organisation structure. See page 25.

 

FURTHER IMPAIRMENT DETAIL (continued)

ECL sensitivity to economic assumptions

The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by generating four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group’s base case assumptions used for medium-term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. If the base case moves adversely it generates a new, more adverse downside and severe downside which are then incorporated into the ECL. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. These assumptions can be found on pages 19 and 18.

The table below shows the Group’s ECL for the probability-weighted, upside, base case, downside and severe downside scenarios, the severe downside scenario incorporating adjustments made to CPI inflation and UK Bank Rate paths. The stage allocation for an asset is based on the overall scenario probability-weighted PD and hence the staging of assets is constant across all the scenarios. In each economic scenario the ECL for individual assessments and post-model adjustments is constant reflecting the basis on which they are evaluated.

Underlying basisA Probability-
weighted
£m
    Upside
£m
    Base case
£m
    Downside
£m
    Severe
downside
£m
 
                               
UK mortgages    1,576       877       1,147       1,788       4,327   
Credit cards    682       594       649       742       866   
Other Retail    952       903       937       984       1,048   
Commercial Banking    1,768       1,365       1,580       1,909       3,117   
Other    39       39       39       39       39   
At 30 September 2022    5,017       3,778       4,352       5,462       9,397   
                               
UK mortgages    1,231       856       1,004       1,374       2,607   
Credit cards1    629       546       597       686       804   
Other Retail1    910       863       895       941       1,004   
Commercial Banking1    1,515       1,316       1,413       1,587       2,200   
Other1    229       229       229       229       229   
At 30 June 2022    4,514       3,810       4,138       4,817       6,844   
                               
UK mortgages    1,284       1,084       1,170       1,414       1,833   
Credit cards1    531       453       511       579       682   
Other Retail1    825       760       811       863       950   
Commercial Banking1    1,433       1,295       1,358       1,505       1,859   
Other1    426       426       427       426       424   
At 31 December 2021    4,499       4,018       4,277       4,787       5,748   

1 Reflects the new organisation structure. See page 25.

 

 

FURTHER IMPAIRMENT DETAIL (continued)

Base case and MES economic assumptions

The Group’s base case economic scenario reflects the outlook as of 30 September 2022 and was revised in light of developments in energy pricing, changes in UK fiscal policy prior to the balance sheet date and a continuing shift towards a more restrictive monetary policy stance by central banks. The Group’s updated base case scenario was based upon three conditioning assumptions: first, the war in Ukraine remains ‘local’, without overtly involving neighbouring countries, NATO or China; second, the fiscal loosening implied by the UK Government’s ‘Growth Plan’ of 23 September 2022 would be offset principally by Government spending cuts; and third, central bank reaction functions, including of the Bank of England, are focused on controlling inflation, motivating a more rapid tightening of UK monetary policy. The Group continues to assume that no further UK COVID-19 national lockdowns are mandated. Based on these assumptions and incorporating the macroeconomic information published in the third quarter, the Group’s base case scenario comprises an economic downturn with a rise in the unemployment rate, declining residential and commercial property prices, and continuing increases in the UK Bank Rate against a backdrop of elevated inflationary pressures. Risks to the base case economic view exist in both directions and are partly captured by the generation of alternative economic scenarios. Each of the scenarios includes forecasts for key variables as of the third quarter of 2022, for which data or revisions to history may have since emerged prior to publication.

At 30 September 2022, the Group has included an adjusted severe downside scenario to incorporate high CPI inflation and UK Bank Rate profiles and has adopted this adjusted severe downside scenario in calculating its ECL allowance. This is because the historic macroeconomic and loan loss data upon which the scenario model is calibrated imply an association of downside economic outcomes with lower inflation rates, easier monetary policy, and therefore low interest rates. This adjustment is considered to better reflect the risks around the Group’s base case view in a macroeconomic environment in which supply shocks are the principal concern.

UK economic assumptions – base case scenario by quarter

Key quarterly assumptions made by the Group in the base case scenario are shown below. Gross domestic product is presented quarter-on-quarter. House price growth, commercial real estate price growth and CPI inflation are presented year-on-year, i.e from the equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter.

At 30 September 2022 First
quarter
2022
%
Second
quarter
2022
%
Third
quarter
2022
%
Fourth
quarter
2022
%
First
quarter
2023
%
Second
quarter
2023
%
Third
quarter
2023
%
Fourth
quarter
2023
%
                 
Gross domestic product  0.8   (0.1)  (0.1)  (0.3)  (0.4)  (0.3)  (0.2)  (0.1)
Unemployment rate  3.7   3.8   3.7   3.8   4.3   4.7   5.1   5.4 
House price growth  11.1   12.5   10.4   5.0   (0.2)  (5.8)  (8.2)  (7.9)
Commercial real estate price growth  18.0   18.0   12.3   2.8   (5.6)  (11.8)  (13.7)  (14.4)
UK Bank Rate  0.75   1.25   2.25   4.00   4.00   4.00   4.00   4.00 
CPI inflation  6.2   9.2   10.2   10.7   9.8   6.5   5.2   3.2 

FURTHER IMPAIRMENT DETAIL (continued)

UK economic assumptions – scenarios by year

Key annual assumptions made by the Group are shown below. Gross domestic product and Consumer Price Index (CPI) inflation are presented as an annual change, house price growth and commercial real estate price growth are presented as the growth in the respective indices within the period. Unemployment rate and UK Bank Rate are averages for the period.

 

t 30 September 2022 2022
%
2023
%
2024
%
2025
%
2026
%
2022
to 2026 average
%
             
Upside            
Gross domestic product  3.6   0.4   1.0   1.5   2.1   1.7 
Unemployment rate  3.3   2.8   3.2   3.5   3.8   3.3 
House price growth  6.1   (2.7)  7.2   8.5   6.1   5.0 
Commercial real estate price growth  8.7   (3.6)  0.1   1.0   1.9   1.6 
UK Bank Rate  2.16   5.28   5.17   4.30   4.12   4.20 
CPI inflation  9.0   6.1   2.9   3.2   2.6   4.8 
             
Base case            
Gross domestic product  3.4   (1.0)  0.4   1.4   2.0   1.2 
Unemployment rate  3.7   4.9   5.4   5.5   5.5   5.0 
House price growth  5.0   (7.9)  (0.5)  2.5   2.3   0.2 
Commercial real estate price growth  2.8   (14.4)  (2.7)  0.4   1.9   (2.6)
UK Bank Rate  2.06   4.00   3.38   2.56   2.50   2.90 
CPI inflation  9.1   6.2   2.5   2.2   1.3   4.2 
             
Downside            
Gross domestic product  3.2   (2.3)  (0.2)  1.2   1.9   0.8 
Unemployment rate  4.1   6.6   7.5   7.3   7.2   6.5 
House price growth  3.9   (12.9)  (8.9)  (5.4)  (3.3)  (5.5)
Commercial real estate price growth  (1.4)  (23.0)  (6.5)  (2.5)  (0.2)  (7.1)
UK Bank Rate  2.00   2.93   1.76   1.04   1.07   1.76 
CPI inflation  9.0   6.0   1.9   1.1   0.0   3.6 
             
Severe downside            
Gross domestic product  2.4   (4.5)  (0.3)  1.0   1.8   0.0 
Unemployment rate  4.9   9.8   10.5   10.0   9.5   8.9 
House price growth  2.4   (17.9)  (16.6)  (10.3)  (6.0)  (10.0)
Commercial real estate price growth  (9.2)  (35.7)  (13.6)  (6.4)  (0.7)  (14.1)
UK Bank Rate – modelled  1.78   0.91   0.36   0.21   0.23   0.70 
UK Bank Rate – adjusted  2.44   7.00   4.88   3.00   2.75   4.01 
CPI inflation – modelled  9.1   5.9   1.0   (0.4)  (1.9)  2.7 
CPI inflation – adjusted  9.9   14.3   9.0   4.1   1.3   7.7 
             
Probability-weighted            
Gross domestic product  3.3   (1.3)  0.3   1.4   2.0   1.1 
Unemployment rate  3.8   5.3   5.9   5.9   5.9   5.4 
House price growth  4.7   (8.8)  (2.3)  0.6   0.9   (1.1)
Commercial real estate price growth  2.1   (15.8)  (4.1)  (1.0)  1.0   (3.8)
UK Bank Rate – modelled  2.04   3.75   3.13   2.39   2.33   2.73 
UK Bank Rate – adjusted  2.11   4.36   3.58   2.67   2.58   3.06 
CPI inflation – modelled  9.1   6.1   2.3   1.9   1.0   4.1 
CPI inflation – adjusted  9.1   6.9   3.1   2.4   1.3   4.6 

 

 

INTEREST RATE SENSITIVITY

The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 30 September 2022, the Group’s structural hedge had an approved capacity of £250 billion (up £10 billion on 31 December 2021 and stable compared to 30 June 2022).

 

Illustrative cumulative impact of parallel shifts in interest rate curve1

The table below shows the banking book net interest income sensitivity to an instantaneous parallel increase in interest rates. Sensitivities reflect shifts in the interest rate curve. The marginal reduction in Year 1 sensitivity compared to the year-end and half-year has been driven by structural hedge maturity reinvestment. The actual impact will also depend on the prevailing regulatory and competitive environment at the time. This sensitivity is illustrative and does not reflect new business margin implications and/or pricing actions today or in future periods, other than as outlined.

The following assumptions have been applied:

  • Instantaneous parallel shift in interest rate curve, including UK Bank Rate
  • Balance sheet remains constant
  • Illustrative 50 per cent pass-through on deposits and 100 per cent pass-through on assets, which could be different in practice
  Year 1
£m
    Year 2
£m
    Year 3
£m
 
                 
+100bps  c.625       c.1,025       c.1,450   
+50bps  c.300       c.525       c.725   
+25bps  c.150       c.250       c.350   

1 Sensitivity based on modelled impact on banking book net interest income, including the future impact of structural hedge maturities. Annual impacts are presented for illustrative purposes only and are based on a number of assumptions which are subject to change. Year 1 reflects the 12 months from the 30 September 2022 balance sheet position.

 

ALTERNATIVE PERFORMANCE MEASURES

In addition to the statutory basis of presentation, the results are also presented on an underlying basis. The Group Executive Committee, which is the chief operating decision maker for the Group, reviews the Group’s results on an underlying basis in order to assess performance and allocate resources. Management uses underlying profit before tax, an alternative performance measure, as a measure of performance and believes that it provides important information for investors because it allows for a comparable representation of the Group’s performance by removing the impact of items such as volatility caused by market movements outside the control of management.

In arriving at underlying profit, statutory profit before tax is adjusted for the items below, to allow a comparison of the Group’s underlying performance:

  • Restructuring costs relating to merger, acquisition and integration activities
  • Volatility and other items, which includes the effects of certain asset sales, the volatility relating to the Group’s hedging arrangements and that arising in the insurance business, the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets

As announced at the 2021 full-year, in the first quarter of 2022 the Group adopted a new basis for cost reporting, including all restructuring costs, with the exception of merger, acquisition and integration costs, within operating costs. Non lending-related fraud costs, previously included within underlying impairment, are also now reported as part of operating costs. This has not impacted the statutory impairment charge. Comparatives have been presented on a consistent basis.

The analysis of lending and expected credit loss (ECL) allowances is presented on an underlying basis. On a statutory basis, purchased or originated credit-impaired (POCI) assets include a fixed pool of mortgages that were purchased as part of the HBOS acquisition at a deep discount to face value reflecting credit losses incurred from the point of origination to the date of acquisition. Over time, these POCI assets will run off as the loans redeem, pay down or losses crystallise. The underlying basis assumes that the lending assets acquired as part of a business combination were originated by the Group and are classified as either Stage 1, 2 or 3 according to the change in credit risk over the period since origination. Underlying ECL allowances have been calculated accordingly. The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances.

The Group calculates a number of metrics that are used throughout the banking and insurance industries on an underlying basis. A description of these measures and their calculation, which remain unchanged since the year-end, is set out on pages 27 to 31 of the Group’s 2022 Half-Year Results News Release.

 

ALTERNATIVE PERFORMANCE MEASURES (continued)

  Nine months ended
30 Sep
2022
    Nine months ended
30 Sep
2021
 
           
Banking net interest marginA          
Underlying net interest income (£m)  9,529       8,270   
Remove non-banking underlying net interest expense (£m)  69       86   
Banking underlying net interest income (£m)  9,598       8,356   
           
Statutory net loans and advances to customers (£bn)  456.3       450.5   
Add back expected credit loss allowance (drawn) (£bn)  4.3       4.4   
Acquisition related fair value adjustments (£bn)  0.4       0.4   
Underlying gross loans and advances to customers (£bn)  461.0       455.3   
Adjustment for non-banking and other items:          
Fee-based loans and advances (£bn)  (8.1)      (5.4)  
Other non-banking and other items (£bn)  4.4       0.9   
Interest-earning banking assets (£bn)  457.3       450.8   
Averaging (£bn)  (5.9)      (7.8)  
Average interest-earning banking assets (£bn)A  451.4       443.0   
           
Banking net interest marginA 2.84%     2.52%  

 

 

 

  Nine months ended
30 Sep
2022
    Nine months ended
30 Sep
2021
 
           
Return on tangible equityA          
Profit attributable to ordinary shareholders (£m)  3,632       5,064   
           
Average shareholders’ equity (£bn)  44.4       44.7   
Remove average intangible assets (£bn)  (6.6)      (6.3)  
Average tangible equity (£bn)  37.8       38.4   
           
Return on tangible equityA 12.9%     17.6%  
 

BASIS OF PRESENTATION

This news release covers the results of Lloyds Banking Group plc together with its subsidiaries (the Group) for the nine months to 30 September 2022. Unless otherwise stated, income statement commentaries throughout this document compare the nine months to 30 September 2022 to the nine months to 30 September 2021, and the balance sheet analysis compares the Group balance sheet as at 30 September 2022 to the Group balance sheet as at 31 December 2021. The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. These measures are labelled with a superscript ‘A’ throughout this document. Further information on these measures is set out on page 23. Unless otherwise stated, commentary on page 1 is given on an underlying basis. The Q3 2022 Interim Pillar 3 Report can be found at www.lloydsbankinggroup.com/investors/financial-downloads.

Operating cost comparatives have been presented to reflect the new costs basis, consistent with the current period. See page 23.

Segmental information: On 1 July 2022 the Group adopted a new organisation structure, aligned to our strategic objectives and our existing three customer-facing divisions. Disclosure will continue to be based on these three divisions, reflecting the basis on which management runs the Group. To reflect the new organisation structure, the Group migrated certain business units between these divisions, with Business Banking and Commercial Cards moving from Retail to Commercial Banking and Wealth moving from Insurance, Pensions and Investments (previously Insurance and Wealth) to Retail; comparatives have been represented accordingly. Total Group figures are unaffected by these changes.

 

FORWARD LOOKING STATEMENTS

This document contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and section 27A of the US Securities Act of 1933, as amended, with respect to Lloyds Banking Group plc together with its subsidiaries (the Group) and its current goals and expectations. Statements that are not historical or current facts, including statements about the Group’s or its directors’ and/or management’s beliefs and expectations, are forward looking statements. Words such as, without limitation, ‘believes’, ‘achieves’, ‘anticipates’, ‘estimates’, ‘expects’, ‘targets’, ‘should’, ‘intends’, ‘aims’, ‘projects’, ‘plans’, ‘potential’, ‘will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘may’, ‘seek’, ‘estimate’, ‘probability’, ‘goal’, ‘objective’, ‘deliver’, ‘endeavour’, ‘prospects’, ‘optimistic’ and similar expressions or variations on these expressions are intended to identify forward looking statements. These statements concern or may affect future matters, including but not limited to: projections or expectations of the Group’s future financial position, including profit attributable to shareholders, provisions, economic profit, dividends, capital structure, portfolios, net interest margin, capital ratios, liquidity, risk-weighted assets (RWAs), expenditures or any other financial items or ratios; litigation, regulatory and governmental investigations; the Group’s future financial performance; the level and extent of future impairments and write-downs; the Group’s ESG targets and/or commitments; statements of plans, objectives or goals of the Group or its management and other statements that are not historical fact; expectations about the impact of COVID-19; and statements of assumptions underlying such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward looking statements include, but are not limited to: general economic and business conditions in the UK and internationally; market related risks, trends and developments; risks concerning borrower and counterparty credit quality; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; volatility in credit markets; volatility in the price of the Group’s securities; changes in consumer behaviour; any impact of the transition from IBORs to alternative reference rates; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group’s credit ratings; the ability to derive cost savings and other benefits including, but without limitation, as a result of any acquisitions, disposals and other strategic transactions; inability to capture accurately the expected value from acquisitions; potential changes in dividend policy; the ability to achieve strategic objectives; insurance risks; management and monitoring of conduct risk; exposure to counterparty risk; credit rating risk; tightening of monetary policy in jurisdictions in which the Group operates; instability in the global financial markets, including within the Eurozone, and as a result of ongoing uncertainty following the exit by the UK from the European Union (EU) and the effects of the EU-UK Trade and Cooperation Agreement; political instability including as a result of any UK general election and any further possible referendum on Scottish independence; operational risks; conduct risk; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural pandemic (including but not limited to the COVID-19 pandemic) and other disasters; inadequate or failed internal or external processes or systems; acts of hostility or terrorism and responses to those acts, or other such events; geopolitical unpredictability; the war between Russia and Ukraine; the tensions between China and Taiwan; risks relating to sustainability and climate change (and achieving climate change ambitions), including the Group’s ability along with the government and other stakeholders to measure, manage and mitigate the impacts of climate change effectively; changes in laws, regulations, practices and accounting standards or taxation; changes to regulatory capital or liquidity requirements and similar contingencies; assessment related to resolution planning requirements; the policies and actions of governmental or regulatory authorities or courts together with any resulting impact on the future structure of the Group; failure to comply with anti-money laundering, counter terrorist financing, anti-bribery and sanctions regulations; failure to prevent or detect any illegal or improper activities; projected employee numbers and key person risk; increased labour costs; assumptions and estimates that form the basis of the Group’s financial statements; the impact of competitive conditions; and exposure to legal, regulatory or competition proceedings, investigations or complaints. A number of these influences and factors are beyond the Group’s control. Please refer to the latest Annual Report on Form 20-F filed by Lloyds Banking Group plc with the US Securities and Exchange Commission (the SEC), which is available on the SEC’s website at www.sec.gov, for a discussion of certain factors and risks. Lloyds Banking Group plc may also make or disclose written and/or oral forward-looking statements in other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group plc to third parties, including financial analysts. Except as required by any applicable law or regulation, the forward-looking statements contained in this document are made as of today’s date, and the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this document whether as a result of new information, future events or otherwise. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.

 

CONTACTS

For further information please contact:

INVESTORS AND ANALYSTS

Douglas Radcliffe

Group Investor Relations Director

020 7356 1571

douglas.radcliffe@lloydsbanking.com

Edward Sands

Director of Investor Relations

020 7356 1585

edward.sands@lloydsbanking.com

Nora Thoden

Director of Investor Relations – ESG

020 7356 2334

nora.thoden@lloydsbanking.com

CORPORATE AFFAIRS

Grant Ringshaw

External Relations Director

020 7356 2362

grant.ringshaw@lloydsbanking.com

Matt Smith

Head of Media Relations

020 7356 3522

matt.smith@lloydsbanking.com

 

 

Copies of this News Release may be obtained from:

Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN

The statement can also be found on the Group’s website – www.lloydsbankinggroup.com

Registered office: Lloyds Banking Group plc, The Mound, Edinburgh, EH1 1YZ

Registered in Scotland No. SC095000

 

 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

 



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Language: English
Company: Lloyds Banking Group PLC
Gresham Street
EC2V 7HN London
United Kingdom
Phone: 020 7626 1500
Internet: www.lloydsbankinggroup.com
ISIN: GB0008706128
WKN: 871784
Listed: Regulated Unofficial Market in Berlin, Dusseldorf, Frankfurt, Hamburg, Hanover, Munich, Stuttgart, Tradegate Exchange; London, BX, SIX
EQS News ID: 1473103

 
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